Vanguard Index Shift Could Hit Korean Stocks: Forefront Capital

By Brendan Conway

The ETF strategists at Forefront Capital Management are predicting a “material short term impact” on South Korean stocks, on account of Vanguard Group’s index changes. For the word material you should think downward.

Recall that the popular Vanguard MSCI Emerging Markets (VWO) will need to sell billions in Korean stocks on account of switching to FTSE Group benchmarks instead of those offered by MSCI Inc. (MSCI). It’s not clear exactly when that will happen, except that it will be stretched out over a period of months.

The same reasons that Korea is still considered an emerging market by MSCI are reasons to think that prices could get pushed around. Investors looking to buy Korean stocks should be watching closely.

From a recent analysis by Forefront:

[A] key reason why South Korea is classified as an emerging market is because of inefficiencies in its capital markets. For example, shares in Samsung Electronics (SSNLF) which represent 18% of the Kospi Index cannot be crossed on markets. We suggest investors interested in monitoring this transition follow Samsung and the BlackRock iShares [MSCI Korea Index Fund] (EWY). The short interest in EWY has ranged at about 1.5 million to 6 million shares and its short interest ratio ranged at about 1 since 2007 (High 1.84/Low .5).

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